Virgin Aviation TM Limited & Anor v Alaska Airlines Inc

Clause 3.6 provided that: “The User undertakes that, for as long as it provides the Licensed Activities, it shall continue to do so using the Names and shall use all reasonable efforts to promote its conduct of the Licensed Activities under the Names.”

Under Clause 8.1, Virgin America agreed to pay to Virgin an annual royalty calculated as 0.5% of “Gross Sales”. Gross Sales were defined as “the total amount received by the User and/or its sublicensees and assignees in connection with the carrying on of the Licensed Activities…”. Thus, Gross Sales referred solely to revenues from the Licensed Activities, and did not distinguish between revenues attributable to use of the Virgin brand and other revenues.

The Licensed Activities were defined in Schedule 1 and, broadly, encompassed the operation of an airline in the US, Canada, Mexico and the Caribbean, and associated activities.

By way of summary:

The DOT analysed five specific control factors. The fourth factor was the 2005 TMLA. In this regard, the DOT stated:

Virgin America explained that:

Virgin America went on to explain that the amended 2005 TMLA would give Virgin America the right to fly and code-share unfettered outside the designated territories (the US, Canada, Mexico and the Caribbean (the “Territories”)) without using the Virgin brand, so that Virgin America could fly and codeshare anywhere in the world, including in the Territories under any brand, and in the Territories under the Virgin brand.

Virgin America further stated as follows:

In this context, Virgin America relied on evidence given by an economist, Professor Alan Shapiro, that “when compared to standard franchise agreements … this Licensing Agreement is uncommonly loose. Indeed, far from constituting control, the Licensing Agreement … particularly as amended, is quite liberal and permissive.”

The key amendment proposed to be made to the 2005 TMLA was that Virgin America proposed to add the following words as Clause 3.7:

Virgin America also explained that Virgin had given up a number of veto rights, but had retained the veto right “over … the company selling itself to a U.S. airline competitor”.

This order made a tentative finding that, contrary to the previous order to show cause, Virgin America was a US citizen.

The order set out the arguments of Virgin America and of the opponents of Virgin America’s application. The DOT’s decision in respect of the TMLA proposals was (in full) as follows:

“The Order favorably highlighted changes that had been offered on the License Agreement, but it also found that they did not go far enough to address all aspects of impermissible License Agreement control. To remedy these remaining concerns, the DOT set out three additional conditions that had to be satisfied before Virgin America could be granted a certificate.

First, the Department noted that the License Agreement must be modified to show that “any operations (including code sharing) - even in direct competition with Virgin Atlantic - so long as applicant does not use the ‘Virgin’ name in those operations” would be permitted.

Second, the Department noted that the License Agreement must presumptively permit Virgin America’s operations, except “in certain limited respects such as operations that use the Virgin mark.” In other words, DOT requires that Virgin America’s ability to operate with the Virgin Name or Mark to be stated affirmatively, not as an exception.

In its third and final condition to certification, the Department required the deletion of the provision that required Virgin America to pay royalties even when it operated without using the Virgin Name or Mark. In particular, DOT required “an amendment to the [License Agreement] that allows [Virgin America to operate outside of the Name or Mark] without royalty obligation.” The Department went on to explain that the “payment of ‘royalties’ on revenues not derived from use of the brand name would undermine the applicant’s independence.”

The DOT’s Order in this respect appears consistent with the text of the new EU-US agreement, specifically in Annex 5 regarding franchising and branding. There, the parties recognized that airlines of each party can enter into franchising or branding arrangements, including conditions relating to brand protection and operational matters provided that: “they comply, in particular, with the applicable laws and regulations concerning control,” and provide for the “right of the franchisor or franchisee to terminate the arrangement and withdraw the brand.” In short, the new EU-US agreement ensures that “the ability of the airline to exist outside the franchise is not jeopardized.”

We are not admitted to practice law in the United Kingdom, so we cannot render any official interpretation of the rights and obligations of the parties under the License Agreement according to English law, which the License Agreement states is controlling law. However, we would note, that as was previously discussed and agreed upon with your U.S.-based counsel, it is our view that your January 17, 2007 amendment to section 3.7 (quoted above) already permits Virgin America to operate or code share internationally outside the defined “Territories,” including in competition with Virgin Atlantic, provided it does so without using the Virgin Mark or Name. As a result, DOT’S first two “conditions” can be addressed simply by amending section 3.7 of the License Agreement and restating this provision and our understanding of it in the affirmative, as we have proposed in the attached redline draft agreement.

Regarding the condition to remove the requirement of Virgin America to pay royalties in the unlikely event that the airline does not use the Virgin Name or Mark, we have also suggested language in the attached document to conform to the Order.”

“As you will see on page 57 of the Order, three of the conditions require limited amendments to the Trademark License Agreement (the “License”). We are writing to formally request modification of the License by VAL Trademark Three Limited to address DOT’s requirements and ensure DOT will issue Virgin America an operating certificate. For your background, I also attach a letter from our regulatory counsel to Ms. Frances Farrow explaining these conditions and the required changes.

As you will see from the Order and letter, two of the conditions essentially require the rights already conferred by the License to be re-stated in affirmative terms rather than the “no prohibition” wording presently included. As DOT stated:

• “[W]e propose to condition certification of the applicant on modification of the License Agreement so as to permit any operations (including code sharing)—even in direct competition with Virgin Atlantic—so long as the applicant does not use the “Virgin” name in those operations.”

• “[W]e propose to condition certification of the applicant on a modification of the license such that the applicant’s operations are presumptively permitted, except in certain limited respects such as operations that use the Virgin mark.”

In my view, these conditions should be addressed relatively easily by simply amending the License to affirmatively state such rights, as our counsel has suggested. This would not appear to change the substance of the License, as amended.

As you know, Virgin America’s business plan does not envision operations outside the Territories, nor does it envision operating outside of the Virgin name. It remains our intent to utilize the brand to the fullest extent possible under the License to grow and enhance Virgin America’s network within the Territories. I believe this view is shared by our US investors, who have re-iterated that the ability to utilize the brand was and is fundamental to their decision to invest.

The third condition requires the deletion of the provision requiring Virgin America to pay royalties in the event that the airline elects at some future point to operate without using the Virgin name. As DOT stated: “[W]e see no reason why the applicant's operations outside of the license should still be subject to a royalty obligation to the Virgin Group,” which in their view “would undermine the applicant’s independence.”

“3.7 3.7 Notwithstanding any other provision of this Licence, nothing in this License shall prohibit the User at any time during the Term from electing to perform the Licensed Activities or any other activities, including, but not limited to, operating flights, code sharing agreements, blocked space arrangements, or any form of marketing agreements with any other airlines or entities, or operating flights between any points regardless of where such flights originate or terminate, without in any way using the Names or Marks the payment of royalties, so long as the User continues to pay the Royalties in full as and when due and on the basis set out in this Licence. does not use the Name or Mark while undertaking such activities.”

“Notwithstanding any other provision of this Licence, nothing in this Licence shall prohibit the User at any time during the Term from electing to perform the Licensed Activities or any other activities, including, but not limited to, operating flights, code sharing agreements, blocked space arrangements, or any form of marketing agreements with any other airlines or entities, or operating flights between any points regardless of where such flights originate or terminate, without the payment of royalties, so long as the User does not use the Names or Marks while undertaking such activities. Provided, however, that in the event user ceases to use the Names or Marks in a material manner, which shall include but not be limited to where Licensee derives more than twenty percent of its operating revenues within the Territories without using the Names or Marks, then Licensor will have the right to terminate the Licence after 45 days prior written notice and failure to cure by User. Nothing in this provision shall in any way give Licensor the right to terminate the Licence on the basis of the User's non-use of the Names or Marks outside the Territories.”

“In an attempt to further address the Department’s stringent citizenship requirements, the parties have added further language to make clear the presumption that Virgin America can make unfettered business decisions about whether it chooses to use the Virgin Name or Mark or not; and if it decides not to use the Name or Mark, the Company will not have to pay royalties.

[…]

The parties have agreed, at the Department’s behest, to far-reaching changes in the License that now give Virgin America far more flexible rights than it had previously in both domestic and international operations. Because of these required changes, the parties have also agreed to ensure that normal and customary trademark protections continue to be found in this license. Specifically, to avoid a situation where Virgin America could decide to discontinue use of the brand on all except a few flights in the Territories and operate under another brand name on all remaining flights – fulfilling the Department’s desire to be able to exist “outside the brand” – but tying up the trade name with minimal use without any ability of the Virgin Group to terminate and reserve or reassign its License, the parties have now also agreed to a usage requirement, so that the License can be rescinded in the highly unlikely event that Virgin America were to set up another brand within the Territories and reduce in a material manner the operating revenues it generates from use of the License within the Territories. Notably, as the language in the revised Trademark License expressly states “Nothing in this provision shall in any way give Licensor the right to terminate the Licence on the basis of the User’s non-use of the Names or Marks outside the Territories,” and the Company is not required to pay any royalties on any operations inside or outside of the territories, which do not involve the use of the Virgin Mark or Name.

With these additional changes to the Trademark License Agreement, all concerns surrounding Virgin America’s ability to exist and thrive outside of the franchise should be conclusively eliminated.”

“3ai. … to conduct any operations (including code sharing), even in direct competition with Virgin Atlantic and without any royalty obligations to the Virgin Group, so long as the company does not use the “Virgin” name in those operations; and

… to conduct operations that use the Virgin mark, except in certain limited respects.”

Paragraph 3ai referred is to in this judgment as “Condition 3.a.i” or “paragraph 3.a.i”.

The holder shall at all times remain a “Citizen of the United States” as required by 49 U.S.C. 40102(a)(15).

[…]

Should the holder propose any substantial change in its ownership, management, or operations (as defined in 14 CFR § 204.2(l)), it must first comply with the requirements of 14 CFR § 204.5.”

noted that various of the changes being made would “strengthen the actual control of U.S. citizens”;

explained that the Virgin Group was modifying various veto rights in the company’s constitutional documents, including in particular as follows:

concluded that Virgin America would remain a US citizen after the various changes; and

stated:

“Hi John

I’m writing to follow up with Virgin Aviation TM’s response on the matters outstanding from our phone call on Wednesday. Sorry for the delay. Taking the various issues on the TMLA:

Effective Date - you were going to let me have some wording around conditionality of the TMLA on the IPO.

Board seat - to reconfirm, the ask here is limited to a board appointee right in the event that another Virgin Group entity doesn’t have a board appointee. In other words, not an additional director. On that basis we don’t see a likely DOT concern. In any case, Evan is meeting with Cush on Monday and will take this up with him direct.

Royalty reversion date - we will agree to your request that the $4.5bn gross sales test should be looked at on a 4 consecutive calendar quarters basis (not just at financial year end).

Minimum Royalties - Virgin Aviation’s position is that these should be as per the draft - i.e. calculated on the basis of the 0.7% royalty rate, and subject to CPI increase. You said that you were thinking about CPI increase.

Must use - if we can agree other points (inc. board seat), we would be willing to drop the request for an exclusive must use (ie use only Virgin marks) obligation. We would remain with the existing must use regime under Clauses 3.6/3.7. Something for another day.

Term - we would like to have an initial term of 25 years, with automatic renewal for successive ten years periods, in the absence of either party electing to terminate at a point of renewal.”

“Hi Charlie,

Thanks for your comments and suggestions.

In regard to your note ...

Allen will send you something on this.

David and Evan will discuss the Board seat.

Thanks for this.

I am checking with the business team here on your CPI adjustment proposal. For the minimum royalty, our revenue fluctuates significantly from one quarter to another so it would be better to structure as an annual rather than quarterly guarantee.

Very good.

That will work.”

“Minimum Royalty Fee. As you will recall, we had discussed a minimum royalty based on 80% of 2013 revenues which would work like this:

$1,424,678,000 (VX 2013 revenue) x .8 (80% guarantee) x .007 = (royalty rate) = $7,978,197 (guaranteed annual royalty).”

“Virgin License Agreement modified:

■ Term of license extended to 25 years

■ Term of license no longer tied to minimum revenue thresholds

■ Commencing Q1 2016, increased license fee from 0.50% of revenue to 0.70% of revenue until VX reaches $4.5 billion in annual revenue, at which point the fee reverts back to 0.50%

■ Right to appoint one person to the Virgin America board of directors, but only to the extent that another Virgin Group representative is not otherwise sitting on the Virgin America board.”

“Amendment to Virgin License Agreement

■ Virgin America and Virgin Group will revise the Virgin trademark license agreement as part of the 2014 Recapitalization

- Trademark license provides for rights to use the Virgin name on operations in the U.S., Canada, Mexico and the Caribbean (and code share rights to most international destinations)

- Key revisions extend the duration of the agreement and modify license fees:

■ Existing agreement expires in 2022

- Revised license is for 25 years

- Term of license no longer tied to minimum revenue thresholds

■ Commencing Q1 2016, license fee will increase from 0.50% of revenue to 0.70% of revenue until VX reaches $4.5 billion in revenue, then reverts back to 0.50%

- Assuming a revenue CAGR of 9%, expect to reach the $4.5 billion threshold by 2028

- The parties will amend and restate the trademark license agreement

■ New agreement will (1) consolidate current and prior amendments into a single contract, and (2) combine two current license documents (today there are separate airline and affinity credit card license agreements)

- During the term of the license, Virgin Group will have the right to appoint one person to the Virgin America board of directors, but only to the extent that a Virgin Group representative is not otherwise sitting on the Virgin America board.”

Prior to the meeting, Mr Huang emailed Mr Everitt as follows: “We're preparing for the meeting with DOT today, and we are planning on giving them a redline of the TM license as against the latest full version of the document. Can you send the Word version of the current TM license so that I can prepare a redline against the proposed version you sent yesterday?” Mr Everitt provided a copy of the 2007 TMLA, and a redline was produced which included the various changes, including the introduction of a minimum royalty.

Mr Huang requested 5 colour copies of the redline of the TMLA be printed for the DOT meeting.

A table was also produced which set out the reduction of the Virgin Group’s rights in respect of Virgin America as a result of the IPO. The table set out Virgin’s current rights, and indicated which would be lost through the IPO. In summary, after the IPO:

A presentation was also prepared for the DOT meeting. That document referred to modifications to the TMLA in summary. It also showed that Virgin’s voting stock was predicted to be 16.85% of the total and that its general equity interest was predicted to be 38.8% of the total. Prior to the IPO, the figures were c.24.9% and c.49.8% respectively.

“In addition to the ownership changes noted above, you have also stated that Virgin America intends to amend its Trademark License Agreement (“TMLA”) with the Virgin Group. Specifically, you note that the term of TMLA would be extended for 25 years and the TMLA would no longer be subject to minimum revenue thresholds. In addition, commencing in the first quarter of 2016, royalties due under the TMLA (“licensing fees”) would increase from 0.50 percent of revenues to 0.70 percent of revenues until Virgin America reaches $4.5 billion in annual revenue, at which point the licensing fee would revert back to 0.50 percent. The amended TMLA would also require Virgin America to pay the Virgin Group a minimum royalty payment if Virgin America’s royalty payment from licensing fees would otherwise be less than that minimum payment. The Virgin Group would also be provided with a right to appoint one representative to Virgin America’s board of directors under the amended TMLA. You also note that the amended TMLA will continue to permit Virgin America the ability to operate independent of the “Virgin” names and marks without the obligation to pay royalties.” (my emphasis)

Is Alaska obliged to pay the Minimum Royalty even if it does not use the names or marks?

If Alaska stops all use of the names or marks part way through the financial year, is the royalty obligation modified pro-rata in respect of that financial year?

If Alaska stops all use of the names or marks, is that a breach of Clause 3.6 of the Current TMLA?

Virgin sought over a number of years to re-use the Virgin brand in the context of the US airline industry. It pursued a number of avenues, and a series of obstacles and risks were identified. However, none of the avenues pursued proved successful.

Amongst the key reasons that the attempts proved unsuccessful was that Virgin was unable to raise US capital investment for the venture.

In MCC Proceeds Inc v. Bishopsgate Investment Trust [1999] C.L.C. 417 (CA) at §23, Evans LJ explained:

How foreign law applies to the facts, including (for example) what on their proper construction particular orders made by a regulatory body mean, is a matter for the Court alone. MCC Proceeds implicitly recognises that the application of the law to the facts is not a matter for foreign law experts, and this was confirmed explicitly by the Federal Court of Australia in Noza Holdings Pty Ltd v. Commissioner of Taxation [2010] FCA 990, where at §13, Gordon J. said:

Alaska accordingly submitted that:

First, it was said, Dr Dempsey agreed that the aviation market was not a static one, but one intimately connected with fluctuations in both the global economy and national economies, as well as other factors which “create an enormous amount of volatility in [the aviation] industry”. Any analysis of the opportunities in the aviation market therefore had to look at the situation at the particular time the analysis is done, because the economic environment within the aviation industry will vacillate.

Dr Dempsey agreed that the analysis he had conducted in his report was to consider what options Virgin had if, after 25 July 2022, it terminated the Current TMLA and looked to re-use the Names or Marks. That was a forward looking analysis, although it drew on historical data.

Dr Dempsey made clear that he had not analysed the power or value of the Names or Marks in 2014 and had not analysed what a reasonable person would have thought in 2014 would be the ability to use the Names or Marks.

When interpreting a written contract, the court is concerned to identify the intention of the parties by reference to “what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language in the contract to mean”, to quote Lord Hoffmann in Chartbrook Ltd v Persimmon Homes Ltd [2009] AC 1101 , para 14. And it does so by focussing on the meaning of the relevant words, in this case Clause 3(2) of each of the 25 leases, in their documentary, factual and commercial context. That meaning has to be assessed in the light of (i) the natural and ordinary meaning of the clause, (ii) any other relevant provisions of the lease, (iii) the overall purpose of the clause and the lease, (iv) the facts and circumstances known or assumed by the parties at the time that the document was executed, and (v) commercial common sense, but (vi) disregarding subjective evidence of any party's intentions. In this connection, see Prenn [1971] 1 WLR 1381 , 1384-1386; Reardon Smith Line Ltd v Yngvar Hansen-Tangen (trading as HE Hansen-Tangen) [1976] 1 WLR 989 , 995-997, per Lord Wilberforce; Bank of Credit and Commerce International SA v Ali [2002] 1 AC 251 , para 8, per Lord Bingham of Cornhill; and the survey of more recent authorities in Rainy Sky [2011] 1 WLR 2900 , paras 21-30, per Lord Clarke of Stone-cum-Ebony JSC. 

For present purposes, I think it is important to emphasise seven factors.

First, the reliance placed in some cases on commercial common sense and surrounding circumstances (e.g. in Chartbrook [2009] AC 1101 , paras 16-26) should not be invoked to undervalue the importance of the language of the provision which is to be construed. The exercise of interpreting a provision involves identifying what the parties meant through the eyes of a reasonable reader, and, save perhaps in a very unusual case, that meaning is most obviously to be gleaned from the language of the provision. Unlike commercial common sense and the surrounding circumstances, the parties have control over the language they use in a contract. And, again save perhaps in a very unusual case, the parties must have been specifically focussing on the issue covered by the provision when agreeing the wording of that provision. 

Secondly, when it comes to considering the centrally relevant words to be interpreted, I accept that the less clear they are, or, to put it another way, the worse their drafting, the more ready the court can properly be to depart from their natural meaning. That is simply the obverse of the sensible proposition that the clearer the natural meaning the more difficult it is to justify departing from it. However, that does not justify the court embarking on an exercise of searching for, let alone constructing, drafting infelicities in order to facilitate a departure from the natural meaning. If there is a specific error in the drafting, it may often have no relevance to the issue of interpretation which the court has to resolve.

The third point I should mention is that commercial common sense is not to be invoked retrospectively. The mere fact that a contractual arrangement, if interpreted according to its natural language, has worked out badly, or even disastrously, for one of the parties is not a reason for departing from the natural language. Commercial common sense is only relevant to the extent of how matters would or could have been perceived by the parties, or by reasonable people in the position of the parties, as at the date that the contract was made. Judicial observations such as those of Lord Reid in Wickman Machine Tools Sales Ltd v L Schuler AG [1974] AC 235 , 251 and Lord Diplock in Antaios Cia Naviera SA v Salen Rederierna AB (The Antaios) [1985] AC 191 , 201, quoted by Lord Carnwath JSC at para 110, have to be read and applied bearing that important point in mind. 

Fourthly, while commercial common sense is a very important factor to take into account when interpreting a contract, a court should be very slow to reject the natural meaning of a provision as correct simply because it appears to be a very imprudent term for one of the parties to have agreed, even ignoring the benefit of wisdom of hindsight. The purpose of interpretation is to identify what the parties have agreed, not what the court thinks that they should have agreed. Experience shows that it is by no means unknown for people to enter into arrangements which are ill-advised, even ignoring the benefit of wisdom of hindsight, and it is not the function of a court when interpreting an agreement to relieve a party from the consequences of his imprudence or poor advice. Accordingly, when interpreting a contract a judge should avoid re-writing it in an attempt to assist an unwise party or to penalise an astute party. 

The fifth point concerns the facts known to the parties. When interpreting a contractual provision, one can only take into account facts or circumstances which existed at the time that the contract was made, and which were known or reasonably available to both parties. Given that a contract is a bilateral, or synallagmatic, arrangement involving both parties, it cannot be right, when interpreting a contractual provision, to take into account a fact or circumstance known only to one of the parties.

Sixthly, in some cases, an event subsequently occurs which was plainly not intended or contemplated by the parties, judging from the language of their contract. In such a case, if it is clear what the parties would have intended, the court will give effect to that intention. An example of such a case is Aberdeen City Council v Stewart Milne Group Ltd 2012 SC (UKSC) 240 , where the court concluded that “any … approach” other than that which was adopted “would defeat the parties' clear objectives”, but the conclusion was based on what the parties “had in mind when they entered into” the contract: see paras 21 and 22. 

Seventhly, reference was made in argument to service charge clauses being construed “restrictively”. I am unconvinced by the notion that service charge clauses are to be subject to any special rule of interpretation. Even if (which it is unnecessary to decide) a landlord may have simpler remedies than a tenant to enforce service charge provisions, that is not relevant to the issue of how one interprets the contractual machinery for assessing the tenant's contribution. The origin of the adverb was in a judgment of Rix LJ in McHale v Earl Cadogan [2010] HLR 412 , para 17. What he was saying, quite correctly, was that the court should not “bring within the general words of a service charge clause anything which does not clearly belong there”. However, that does not help resolve the sort of issue of interpretation raised in this case.

It is not appropriate in this case to reformulate the guidance given in the Rainy Sky and Arnold cases; the legal profession has sufficient judicial statements of this nature. But it may assist if I explain briefly why I do not accept the proposition that the Arnold case involved a recalibration of the approach summarised in the Rainy Sky case. 

The court's task is to ascertain the objective meaning of the language which the parties have chosen to express their agreement. It has long been accepted that this is not a literalist exercise focused solely on a parsing of the wording of the particular clause but that the court must consider the contract as a whole and, depending on the nature, formality and quality of drafting of the contract, give more or less weight to elements of the wider context in reaching its view as to that objective meaning. In Prenn v Simmonds [1971] 1 WLR 1381 , 1383H–1385D and in Reardon Smith Line Ltd v Yngvar Hansen-Tangen (trading as HE Hansen-Tangen) [1976] 1 WLR 989 , 997, Lord Wilberforce affirmed the potential relevance to the task of interpreting the parties' contract of the factual background known to the parties at or before the date of the contract, excluding evidence of the prior negotiations. When in his celebrated judgment in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 , 912–913 Lord Hoffmann reformulated the principles of contractual interpretation, some saw his second principle, which allowed consideration of the whole relevant factual background available to the parties at the time of the contract, as signalling a break with the past. But Lord Bingham of Cornhill in an extrajudicial writing, “A New Thing Under the Sun? The Interpretation of Contracts and the ICS decision” (2008) 12 Edin LR 374, persuasively demonstrated that the idea of the court putting itself in the shoes of the contracting parties had a long pedigree. 

Lord Clarke of Stone-cum-Ebony JSC elegantly summarised the approach to construction in the Rainy Sky case [2011] 1 WLR 2900 , para 21f. In the Arnold case [2015] AC 1619 all of the judgments confirmed the approach in the Rainy Sky case: Lord Neuberger of Abbotsbury PSC, paras 13–14; Lord Hodge JSC, para 76 and Lord Carnwath JSC, para 108. Interpretation is, as Lord Clarke JSC stated in the Rainy Sky case (para 21), a unitary exercise; where there are rival meanings, the court can give weight to the implications of rival constructions by reaching a view as to which construction is more consistent with business common sense. But, in striking a balance between the indications given by the language and the implications of the competing constructions the court must consider the quality of drafting of the clause (the Rainy Sky case, para 26, citing Mance LJ in Gan Insurance Co Ltd v Tai Ping Insurance Co Ltd (No 2) [2001] 2 All ER (Comm) 299 , paras 13, 16); and it must also be alive to the possibility that one side may have agreed to something which with hindsight did not serve his interest: the Arnold case, paras 20, 77. Similarly, the court must not lose sight of the possibility that a provision may be a negotiated compromise or that the negotiators were not able to agree more precise terms. 

This unitary exercise involves an iterative process by which each suggested interpretation is checked against the provisions of the contract and its commercial consequences are investigated: the Arnold case, para 77 citing In re Sigma Finance Corpn [2010] 1 All ER 571 , para 12, per Lord Mance JSC. To my mind once one has read the language in dispute and the relevant parts of the contract that provide its context, it does not matter whether the more detailed analysis commences with the factual background and the implications of rival constructions or a close examination of the relevant language in the contract, so long as the court balances the indications given by each. 

Textualism and contextualism are not conflicting paradigms in a battle for exclusive occupation of the field of contractual interpretation. Rather, the lawyer and the judge, when interpreting any contract, can use them as tools to ascertain the objective meaning of the language which the parties have chosen to express their agreement. The extent to which each tool will assist the court in its task will vary according to the circumstances of the particular agreement or agreements. Some agreements may be successfully interpreted principally by textual analysis, for example because of their sophistication and complexity and because they have been negotiated and prepared with the assistance of skilled professionals. The correct interpretation of other contracts may be achieved by a greater emphasis on the factual matrix, for example because of their informality, brevity or the absence of skilled professional assistance. But negotiators of complex formal contracts may often not achieve a logical and coherent text because of, for example, the conflicting aims of the parties, failures of communication, differing drafting practices, or deadlines which require the parties to compromise in order to reach agreement. There may often therefore be provisions in a detailed professionally drawn contract which lack clarity and the lawyer or judge in interpreting such provisions may be particularly helped by considering the factual matrix and the purpose of similar provisions in contracts of the same type. The iterative process, of which Lord Mance JSC spoke in Sigma Finance Corpn [2010] 1 All ER 571 , para 12, assists the lawyer or judge to ascertain the objective meaning of disputed provisions. 

On the approach to contractual interpretation, the Rainy Sky and Arnold cases were saying the same thing. 

The recent history of the common law of contractual interpretation is one of continuity rather than change. One of the attractions of English law as a legal system of choice in commercial matters is its stability and continuity, particularly in contractual interpretation.

“7.24 The interpretation of a document as a whole necessarily involves giving effect to each part of it in relation to all other parts of it. Accordingly, as a corollary of the principle that a document must be interpreted as a whole, effect must be given to each part of the document. This in turn means that in general each part of the document is taken to have been deliberately inserted, having regard to all the other parts of the document, with the result that there is a presumption against redundant words (usually called “surplusage”). This principle is sometimes labelled the argument from redundancy. Although this principle was often given weight in earlier cases, its value is much reduced in more modern cases. As Patten LJ put it in Al-Hasawi v Nottingham Forest Football Club Ltd , “arguments based on surplusage or redundancy are rarely reliable or sure ground on issues of construction”

Clause 3.1 begins with the words: “In consideration of the payment of Airline Royalties to [Virgin] by [Alaska], [Virgin] grants to [Alaska] the right … to use the Marks only in connection with and in the ordinary course of carrying on the Licensed Activities”. (Footnote: ⁴)

The term “Licensed Activities” means, “…the activities described in Schedule 1…”.

3.6 provides:

Clause 3.7 provids:

Clause 8.1 provides as follows:

Clause 8.6 states

Minimum Royalty is a defined term, and is defined as follows:

First, it states that the payment of royalties is: “In consideration of the grant of the Airline Rights granted pursuant to Clause 3”, defined as “the rights granted by [Virgin] to [Alaska] pursuant to Clause 3 of this agreement”. Clause 3 goes on to define the scope and extent of the rights granted to Alaska. Therefore, the payment of royalties is not, it was argued, in consideration of the actual use of the Virgin brand, or in consideration of the generation of revenues: the payment of royalties, including the Minimum Royalty, is in consideration for the grant of the rights to use the Virgin brand as defined in Clause 3.

Second, the primary method for calculating and paying the royalty is quarterly, by reference to a percentage of quarterly “Gross Sales”. Gross Sales are defined, broadly, as revenues received “in connection with the carrying on of the Licensed Activities”. The Licensed Activities have a lengthy definition in Schedule 1 of the Current TMLA but essentially comprise the operation of an airline in the US and other defined territories. Thus, the primary obligation is the payment of royalties quarterly based on a given percentage of revenues generated from the operation of a US airline.

Third, however, the primary obligation is subject to the Minimum Royalty Obligation in the event that the primary method would produce a figure lower than the Minimum Royalty in any given financial year. They argued that there is nothing in this clause which would disapply it if use of the Virgin brand in connection with the Licensed Activities fell to zero.

Clauses 8.4 and 8.5 set out obligations on Alaska to provide quarterly statements of the Gross Sales within 10 days of the end of each quarter, to pay royalty sums on a quarterly basis alongside the quarterly statements, and to provide an annual statement of Gross Sales within one month of the financial year end (the “Reconciliation Statement”).

The second half of Clause 8.6 then makes clear that if the quarterly payments, in total, fall below the Minimum Royalty, the amount of such underpayment is to be paid.

Thus:

Clause 3.7 means that no royalty is to be payable on non-branded revenues or on non-branded activities. Absent Clause 3.7, the effect of the definition of Gross Sales would be to include revenues from Licensed Activities generated without use of the Virgin brand within the percentage royalty calculations in Clause 8.1. Therefore, on Virgin’s case, Clause 3.7 has an important function to perform: it excludes any revenues not derived from use of the Virgin brand from the royalty calculations. Without Clause 3.7, all US airline revenues would be taken into account. With Clause 3.7, non-branded revenues are excluded from all royalty calculations, and the royalty payments would only be made based on Virgin branded revenues.

This leaves the Minimum Royalty Obligation intact, because the Top Up is simply derived from the amount of royalties paid on branded revenue in the given year, without any consideration of non-branded revenue. On Virgin’s case, Clause 3.7, which was included in identical terms in the earlier 2007 TMLA, means exactly the same thing and performs exactly the same function in both documents.

The fact that Clause 3.7 begins “Notwithstanding any other provision…” is consistent with the above: those words are necessary to ensure that Clause 3.7 is effective both to permit non-branded operations in the first place, and also to exclude non-branded revenues from the quarterly royalty calculations. However, the fact that Clause 3.7 takes precedence over any other clause is only relevant to the extent Clause 3.7 comes into conflict with another clause. It does not come into conflict with the Minimum Royalty provisions, because the latter do not set out a royalty applicable to non-branded activity. Therefore, it was argued, Clause 8.6 stands irrespective of Clause 3.7.

without Clause 3.7, the obligation would be to use only the Virgin brand, which was a matter of significant concern to the DOT in around 2007 (‘must use’);

without Clause 3.6, there would be no obligation to use the Virgin brand at all (‘no use’); and

in combination, the result is a ‘some use’ obligation.

The simple fact was that Virgin America made a substantial change filing with the DOT, and drew to its attention a number of documents, including the proposed new TMLA. The DOT saw the proposals in redline form (in fact, in two different redline forms), was specifically aware of the introduction of a Minimum Royalty, and blessed the Current TMLA. The DOT noted the continuing presence of a permission to operate independent of the Virgin Names and Marks without the obligation to pay royalties.

There is no evidence that the DOT was given any specific information about how the Current TMLA would function in the event of a total cessation of use of the Virgin brand. It appears that the Minimum Royalty provisions were not discussed at the first meeting, and there is no (reliable) evidence they were discussed specifically at the second either. Mr Varley’s evidence on this should be rejected.

The court is therefore left without any evidence as to the DOT’s understanding, and trying to second guess what the DOT thought beyond what is contained in the October 2014 Letter. The Court is being asked to engage in pure speculation for which there would be no warrant. It is impossible to see how such speculation could be relevant evidence in determining the proper interpretation of the Current TMLA.

The expert evidence is not helpful on this point.

Alaska’s only remaining argument on this point appears to be that there was a risk that the DOT would have concluded, had they been made aware of Virgin’s interpretation of the Minimum Royalty Obligation, that Virgin America was no longer a US citizen, and that this risk was enough that Virgin’s interpretation would or should have been raised specifically with the DOT if it were the correct one. This argument is wrong:

Virgin was agreeing to grant a 25 year license without a break clause. At the same time it was losing a raft of rights it previously had to block a potential full or partial take-over of Virgin America by a competitor, whereas any competitor would evidently have its own commercial imperatives in respect of the Virgin brand.

Further, the parties would or could have been well aware that using the Virgin brand in the US airline industry, particularly using it to generate a substantial annual royalty of the same scale as the Minimum Royalty, was something which was likely to be difficult and risky. This proposition is supported by the material relating to the initial licensing of Virgin America, as well as by the evidence of Dr Dempsey and Ms Daniels, which I have already considered and which Virgin submitted I should accept.

Virgin’s case was that given the risk that the IPO would create of a de-brand by a competitor (which was admitted and which was confirmed by Mr Varley), it was perfectly logical to bargain for a Minimum Royalty which did not simply cease to be payable if usage of the Virgin brand ceased. Indeed, Virgin submitted, the level of the Minimum Royalty was to increase with inflation (CPI) throughout the longer term, which tended to indicate that it was intended to continue to be payable throughout the term.

Delta made the DOT aware of the potential conflict of Clauses 3.6 and 3.7, and noted that Clause 3.6 must have been retained for a reason.

The DOT noted the possible conflict in its final order, but nonetheless approved the 2007 TMLA. The DOT did not impose a condition requiring the removal of Clause 3.6.

The obvious inference is that the DOT was content with the residual impact of Clause 3.6.

This accords with commercial sense and with the evident wish of the parties to include IP protections for Virgin within the TMLA. If use of the Virgin brand totally ceased, its “Virgin America” marks would be vulnerable to revocation. However, if use in commerce was made of the marks this would not be the case. Accordingly, the obligation to continue to make more than de minimis use made sound commercial sense. As Mr Quinn explained, protections for the Virgin brand were to both Virgin’s and Virgin America’s benefit.

As a preliminary and perhaps fatal point in respect of this argument, it was said that it can hardly be called unconvincing to say that the royalties are payable in consideration for the grant of the rights, when that is literally what the contract says in terms.

Alaska went on to say that if the payments are in consideration of the rights “one would expect an annual flat fee”. But an annual flat fee is payable as a minimum, the Minimum Royalty. That only serves to support Virgin’s case.

Next Alaska says that “it is commercially unrealistic to consider that a licensee would consider paying such a royalty simply for the benefit of the grant of right rather than for use”. Of course a licensee wishing to use the Virgin brand would pay for the right to use, because they intend to exercise that right. In fact, the Current TMLA grants an exclusive right to use. Virgin America clearly did consider the rights it acquired to be valuable rights. It had a business with a turnover of around $1.5 billion (Footnote: ⁵) predicated entirely on the use of the Virgin brand. It was evidently valuable to Virgin America to have the right to use the Virgin brand and to exclude others from it. Moreover, in this regard, the Minimum Royalty was not a significant percentage of Virgin America’s revenue: it was fixed at 0.56% (Footnote: ⁶) of Virgin America’s 2013 revenue. It is of course no surprise whatsoever that Virgin America was willing to pay this amount commercially, given the centrality of the Virgin brand to its business, and the requirement to secure the Virgin brand long-term as part of the IPO.

What Alaska really means is that it would make no sense for Alaska to have agreed to pay the Minimum Royalty. Even this is not clear, because the Virgin brand rights are plainly valuable even when not used: the value of excluding a brand from the market is shown by existing airlines’ trenchant position to Virgin America seeking to enter the market in 2007; precisely how much the Virgin brand rights are worth is not relevant since the court’s role is not to correct a bad bargain. But leaving that point aside, the Current TMLA was agreed between Virgin America and Virgin, at a time when Alaska was a third party competitor. The repeated attempt to argue the commercial rationality points by reference to Alaska’s position is nonsensical and should be rejected.

Finally, Virgin drew attention to Alaska’s argument that the right to terminate in Clause 3.7 is inconsistent with the royalty payments being in consideration for the mere grant of the rights. Virgin has, it said, never argued that the Current TMLA “was about” solely the grant of IP rights. In fact it is a major part of Virgin’s case that the Current TMLA placed an obligation on Virgin America to exercise the IP rights, under Clause 3.6. The only point of relevance for these purposes is that the royalty payments are, expressly, payments in consideration of the grant of the rights. The only trigger for their payment is that the rights are granted. But the Current TMLA is of course “about” far more than just this simple point, Virgin had a right to terminate for non-use (also indeed, for a decrease in use below 80% of total revenues) is entirely consistent with Virgin’s case.

Virgin conferred valuable and exclusive rights on Virgin America. Agreeing to pay a minimum fixed fee was perfectly logical (and the amount was small as a percentage of revenue, albeit that the court is not here to judge whether it was a good bargain). Virgin had, following the IPO, little or no control over whether Virgin America continued to use the Virgin brand, because Virgin America was vulnerable to being taken over. A fixed fee was an obvious solution to that issue.

It was clearly marked out. The terms of Clause 8 are very clear indeed.

In such a scenario, all airline revenues (i.e. all Gross Sales) are derived from use of the Virgin brand.

In each Quarter, Alaska will pay the relevant percentage (0.7% or 0.5% as the case may be) of all Gross Sales to Virgin as royalties pursuant to Clause 8.1.

At the end of the year, Alaska will submit a Reconciliation Statement. If the total amount of royalties paid is below the Minimum Royalty, a Top Up payment is due. If the total amount is above, there is no requirement for a Top Up.

There is no dispute between the parties as regards the operation of the Current TMLA in Scenario 1.

In Scenario 2, not all Gross Sales are derived from use of the Virgin brand.

Absent Clause 3.7, percentage revenues would be due in each Quarter on all Gross Sales (included non-branded revenues). However, there is no dispute that the effect of Clause 3.7 is to exclude non-branded revenues from the operation of Clause 8.1.

As a result, in each Quarter, Alaska will be obliged to pay the relevant percentage of all the Gross Sales derived from the use of the Virgin brand.

At the end of the year, the position is exactly the same as in Scenario 1. The Reconciliation Statement will record the total Gross Sales derived from the use of the Virgin brand, and the amount of royalty paid. A Top Up will or will not be due depending on whether this exceeds the Minimum Royalty.

This is true wherever there are any Virgin-branded revenues at all, even a very small amount of Virgin-branded revenue.

Again, there is no dispute between the parties as regards the operation of the Current TMLA in Scenario 2.

In Scenario 3, Alaska would not be generating any revenues at all.

In such a situation, in each Quarter, there would be no payment due under Clause 8.1. However, at the end of each financial year, the Minimum Royalty would be due.

Virgin argued that Alaska cannot deny this: Alaska’s argument is that Clause 3.7 entitles it to conduct operations outside the Virgin brand without paying royalties in respect of them, and so where there are non-branded revenues, but no branded revenues, the Minimum Royalty ‘latches on’ to the non-branded revenues in breach of Clause 3.7 (and is thus is not due). However, Alaska’s argument cannot apply where there are no non-branded revenues at all. In such a situation, the Minimum Royalty cannot ‘latch on’ to non-branded revenues in breach of Clause 3.7. Accordingly, on Alaska’s own case, the Minimum Royalty would be due and payable in Scenario 3.

On Virgin’s case, this conclusion is perfectly reasonable: the parties bargained for a Minimum Royalty to which there were no exceptions. Therefore, this particular situation is entirely consistent with all the other situations in which at least the Minimum Royalty is payable.

On Virgin’s case, the Minimum Royalty is due each financial year, just as in every other situation. There would be no quarterly percentage-based payments, because there are no relevant revenues: revenues generated without use of the Virgin brand are excluded by virtue of Clause 3.7. Nonetheless, a Top Up equal to the full Minimum Royalty would be due at the end of the year.

On Alaska’s case, there are also no relevant revenues, and therefore no quarterly payments. However, at the end of the year, Alaska says that no Top Up payment is due in this situation. Despite the fact that Clause 3.7 has already discharged its role, by excluding all Alaska’s non-branded revenues (i.e., in this situation, all revenues) from the quarterly royalty calculation, Alaska’s case is that it then has another function at year-end, namely to prevent any Top Up / Minimum Royalty payment being due.

It is very unclear why Alaska says that Clause 3.7 develops this additional, entirely unstated, role. As noted above, the rationale appears to be that a Minimum Royalty, were it to be payable, should be treated as ‘latching on’ to the non-branded revenue. However, that is simply re-writing the entire contract. It is inconsistent with the words of Clause 8, which make clear that the royalties are due in consideration of the grant of the Airline Rights, and it is inconsistent with the role of Clause 3.7, which is to exclude non-branded revenues from the calculation of royalty payments.

A comparison between Scenario 3 and Scenario 4 shows that, on Alaska’s case, whether or not the Minimum Royalty is due is purely a function of the Alaska group’s corporate structure. If, for example, rather than merging Virgin America with Alaska, the Alaska group had chosen to keep the entities separate, transferring Virgin America’s assets to Alaska, and winding down Virgin America’s operations, that would generate Scenario 3 rather than Scenario 4, and on Alaska’s interpretation the Minimum Royalty would still be due. It is purely as a result of Alaska’s decision to structure the business by merging the two entities that has resulted in Scenario 4, rather than Scenario 3. It is inherently unattractive and contrary to business common sense to interpret a contractual payment obligation as purely contingent on the chosen corporate structure of the obligee.

A comparison between Scenario 2 and Scenario 4 also illustrates that Alaska’s interpretation is anomalous. Alaska’s case is that in Scenario 2, as long as there is some branded revenue, the whole Minimum Royalty will be due each year (as a Top Up payable at the end of the year). For example, if Alaska chose to keep operating a single Virgin branded route because that had a particularly loyal customer base, but only generated $10 million in revenue, only $70,000 of percentage-based royalty would be due by way of four quarterly payments. More than $7.9 million would be due as a Top Up, even on Alaska’s case. And yet Alaska says that the minute the branded route is closed and use ceases entirely, none of the Minimum Royalty is due.

Further, as has already been noted Alaska’s interpretation results in Clause 3.7 having a different meaning in the 2007 TMLA and the Current TMLA, despite the words being the same in the two contracts. On Virgin’s case this anomaly does not arise:

It is perfectly true that the consequence of the terms of the 2007 TMLA was that, if all use of the Virgin brand ceased, so would all royalty payments. The obligation in Clause 8 of the 2007 TMLA was to pay a percentage royalty calculated by reference to Gross Sales. However, revenues derived without use of the Virgin brand were excluded from Gross Sales for this purpose, pursuant to Clause 3.7. Therefore, if Virgin branded revenues fell to zero, so did royalties. This was true irrespective of whether there were or were not any non-branded revenues.

This was purely the practical consequence of Clause 8 as it was in the 2007 TMLA as modified by Clause 3.7. It constitutes a substantial leap of logic to move from this single fact about the operation of Clause 8 of the 2007 TMLA, to a general conclusion that Clause 3.7 should be read as meaning “no use of name, no royalty” irrespective of what both Clause 3.7 and the remainder of the amended contract says. In other words, Alaska seeks to argue that because of one practical example of the operation of the 2007 TMLA, the meaning of Clause 3.7 must be adapted from what it actually says (‘Alaska can do NVA without paying royalties’) to mean what it does not say (‘if Alaska does not do VA, it does not have to pay royalties’). That is obviously flawed logic.

To illustrate this point, under the 2007 TMLA, if Virgin branded revenue reduced by 50%, so did the royalty amount. It would of course be nonsensical to derive from this single example under the 2007 TMLA a general proposition that Clause 3.7 required the royalty amount to halve if revenues halved, irrespective of what the other Clauses of the contract said following amendments in the future.

The reality is that Clause 8 changed substantially in the Current TMLA. Therefore, the question of what the royalty obligation would be when use of the Virgin brand halved, or when it ceased, is entirely at large and cannot be answered by reference to what would have been the case under the 2007 TMLA. To answer a question about the Current TMLA by reference to what would have been the case under the 2007 TMLA is just as flawed in relation to a 100% fall in usage as it is to a 50% fall in usage. Indeed, that is clear from the fact that, even on Alaska’s case, royalties do not halve under the Current TMLA just because branded revenue halves. Rather, the Minimum Royalty would remain payable on any view.

The ordinary and natural meaning of the words in Clause 3.7;

The contractual context;

The purpose of Clause 3.7;

The factual background;

Business common-sense and the reasonableness of the results produced by the parties’ constructions.

Alaska started with Clause 3.7, which I have set out above, and which they submitted, is a well-drafted, sophisticated and complex contractual agreement that was prepared with the assistance of skilled professionals is decisive. They submitted that the words in the first sentence of Clause 3.7 were critical.

The language used in Clause 3.7 tracks that used in Clause 8.6, demonstrating that Clause 3.7 frees Alaska of any obligation under Clause 8.6 in respect of operations outside the Virgin brand. In particular both clauses use the term “royalties”, which Clause 8.6 makes clear includes the “Minimum Royalty” (as the Minimum Royalty is one of the two options for the payment of “royalties” identified by Clause 8.6).

Clause 3.7 enables Alaska to elect to perform all of the activities described in Schedule 1 or any other activities without paying royalties so long as it does not use the Names or Marks while undertaking such activities.

It inevitably follows that if the Names or Marks are not used by Alaska at all, Alaska cannot be obliged by the Current TMLA to pay any royalties – including the Minimum Royalty.

Virgin is wrong to suggest the following:

The second sentence of Clause 3.7 only confirms Alaska’s analysis of the first sentence because it gives Virgin, and not Alaska, the ability to terminate the Current TMLA if the Names or Marks are not used in a ‘material manner’, and therefore to avoid any loss from their non-use.

Clause 3.7 creates a very straight forward, common sense and easy to apply regime: if Alaska does not use the Names or Marks it does not pay any royalties in respect of the Names or Marks.

Virgin’s contention that Clause 3.7 cannot have the meaning Alaska suggests because it introduces difficulties where usage ceases part way through a year, or where usage ceases and then resumes, is unconvincing:

Even before the DOT had raised the issue of royalties being paid on revenues derived without using the Names or Marks as a concern, Mr Quinn had identified this as a serious problem in advice he gave to Virgin America and Virgin.

In Virgin America’s January 2007 submissions to the DOT, prior to the March SCO, Virgin America, despite Mr Quinn’s advice, decided to maintain the royalty provision which Mr Quinn had advised the DOT would object to.

Virgin America did however concede and explain that:

As Mr Quinn had predicted, the DOT in the March SCO identified as problematic the payment of royalties where the Names or Marks were not used. The DOT’s conclusion in the March SCO (as set out in paragraph 11 above) was that: “…we see no reason why the applicant’s operations outside of the license should still be subject to a royalty obligation to the Virgin Group”.

The DOT thereby said in terms that activities that did not use the Names or Marks must be royalty free. That, combined with Virgin America’s representation to the DOT that the revised TMLA would enable it operate ‘completely free’ of the Names or Marks (an amendment which the March SCO expressly recorded was made “[i]n response to the Department’s concerns…”), inevitably meant that the DOT required that Virgin America was free to perform all operations without using the Names or Marks, and without paying royalties if it did so.

Virgin has sought to contend (i) that the DOT’s concern was only on ensuring “revenues not derived from use of the brand name” were royalty free, and (ii) that the DOT did not say anything about a situation where all use of the Names or Marks ceased. Alaska argued that that contention was unsustainable once it is recognised that the DOT had accepted Virgin America’s concession to be able to operate “completely free” of the Names or Marks. Where Virgin America operated completely free of the Names or Marks, which is a scenario the DOT expressly contemplated, it is nonsensical to suggest that the DOT’s March SCO (or its final order (Order 2007-5-11)) was consistent with Virgin America having to pay multi-million dollar royalties until 2039 if it ceased using the Names or Marks entirely.

Following the March SCO:

On 18 May 2007 the DOT issued a “final order” in which it found that, subject to fulfilling certain conditions, Virgin America would be a US citizen and fit, willing and able to engage in interstate scheduled air transportation. One of those was the condition in paragraph 3.a.i of Appendix A to that final order.

To enable Virgin America to operate completely free of the Names or Marks. Complete freedom can only mean the freedom not to use the Names or Marks at all if Virgin America so wished; and

To ensure that if Virgin America did not use the Name or Marks it did not have to pay any royalties (i.e. to be completely free). It inevitably follows that if Virgin America did not use the Names or Marks at all, it did not have to pay any royalties at all.

If the DOT wanted to ensure that royalties were not payable on non-branded revenues, it inevitably followed that the DOT wanted to ensure that if there were no non-branded revenues at all then no royalties whatsoever were payable. The latter follows inevitably from the former.

The more one considers the mechanics of Virgin America having to pay a minimum royalty when it makes no use of the Names or Marks, the more obviously unacceptable to the DOT that situation would be. If Virgin America had to pay a minimum royalty when it made no use of the Names or Marks, then necessarily the money to pay the minimum royalty would have to originate from non-branded revenues. That means that, in substance, Virgin America would be paying Virgin a royalty from non-branded revenues. That result was clearly unacceptable to the DOT, and demonstrates why Virgin’s case makes little sense.

For the reasons above, the purpose of Clause 3.7 of the 2007 TMLA was to ensure that if no use was made of the Names or Marks, no royalties would be payable.

On its true construction, Clause 3.7 of the 2007 TMLA reflected that purpose.

All of the material discussed above was known to the parties at the time they concluded the 2007 TMLA, and the Current TMLA. It is admissible as evidence of the objective aim of the transaction in general and Clause 3.7 in particular. Alaska’s case does not, as Virgin suggests, involve any speculation about what the DOT subjectively thought; rather Alaska’s case is based on an objective interpretation of the DOT’s orders and communications with Virgin America (in which Virgin were closely involved).

It is common ground that the effect of Clause 3.7 of the 2007 TMLA and Clause 3.7 the Current TMLA was the same.

The parties knew or could reasonably have known that Virgin America’s initial certification process had been difficult and protracted; in 2014, the parties were seeking to ensure that the Virgin America IPO proceeded successfully and without the DOT objecting; amending the 2007 TMLA so to oblige Virgin America to pay the Minimum Royalty even if the Names or Marks were not used was a matter that Virgin America should have notified the DOT of; failing to notify the DOT of a substantial change would be a breach of Virgin America’s statutory obligations, and could precipitate adverse action by the DOT, to the detriment of Virgin America generally, and the orderly progression of the IPO in particular; there was no discussion between the parties in July to November 2014 of whether Virgin America was obliged to notify the DOT that the 2007 TMLA was being amended to require it to pay royalties even if no use was made of the Names or Marks, or whether Virgin America could run the risk of not telling the DOT expressly about this change.

The parties knew, or could reasonably have known, that what the DOT was expressly told by Virgin America in 2014, and what the DOT understood, prior to the parties concluding the Current TMLA was that, “…the amended TMLA will continue to permit Virgin America the ability to operate independent of the “Virgin” names and marks without the obligation to pay royalties.” The DOT’s understanding was never corrected by Virgin America.

The parties knew, or could reasonably have known, at the time they concluded the Current TMLA that:

The 26 June 2014 email from James Cahillane, to Mr Varley in which he said, “[g]iven that there will be changes to the TMLA post-IPO, are you intending to include something on these in your presentation to the DOT? I think both VEL and VX will want comfort that there will be no DOT issues with the TMLA changes post-IPO” (emphasis added)

The close involvement of Virgin in reviewing and discussing Virgin America’s submissions prior to the IPO to the DOT.

The time critical nature of an IPO, and the advantages to both sides of a successful IPO.

On 26 June 2014, i.e. shortly before the 8 July 2014 presentation to the DOT, James Cahillane, General Counsel at Virgin Management USA Inc, emailed Mr Varley and said, “[g]iven that there will be changes to the TMLA post-IPO, are you intending to include something on these in your presentation to the DOT? I think both VEL and VX will want comfort that there will be no DOT issues with the TMLA changes post-IPO” (emphasis added). Virgin therefore expressly identified that both parties would want comfort that the DOT would be content with any changes to the 2007 TMLA.

Similarly Virgin America was, in consultation with Virgin, at great pains to identify to the DOT material changes which would affect Virgin America post-IPO: see §51-53 Alaska’s Skel. There is no reason why they would have failed to draw clearly and expressly such an important change to the 2007 TMLA to the attention of the DOT.

US carriers are at pains to maintain good relations with their regulator, the DOT, including by ensuring the DOT considers them to be forthright. It would be inimical to that well known goal of maintaining positive relations with the DOT for Virgin America to have failed to mention a significant change to an important document like the 2007 TMLA to the DOT.

In addition, the DOT is a powerful institution, which expects close co-operation with the carriers to which it has granted a CPCN and expects carriers to be professional and conduct themselves with honour and dignity. As was made clear in evidence, “…if there is any question with respect to what a carrier is going to be doing vis-à-vis their authority, they should contact DOT informally to find out what DOT's opinion is.”. Moreover, no carrier wants to end up in the DOT’s bad books, or to have to reverse a transaction or be the subject to adverse action by the DOT, particularly in the context of US citizenship and fitness.

“In addition to the ownership changes noted above, you have also stated that Virgin America intends to amend its Trademark License Agreement (“TMLA”) with the Virgin Group. Specifically, you note that the term of TMLA would be extended for 25 years and the TMLA would no longer be subject to minimum revenue thresholds… The amended TMLA would also require Virgin America to pay the Virgin Group a minimum royalty payment if Virgin America’s royalty payment from licensing fees would otherwise be less than that minimum payment.…You also note the amended TMLA will continue to permit Virgin America the ability to operate independent of the “Virgin” names and marks without the obligation to pay royalties.”

The DOT did not suggest that it was told or knew that in fact Virgin America’s ability to operate independently of the Names or Marks (the requirement that the DOT had imposed in 2007) was limited by the fact that it had to pay the Minimum Royalty even if no use was made of the Names or Marks.

To the contrary, while the DOT understood that when the royalties derived from continued use of the Virgin brand were below the Minimum Royalty, the Minimum Royalty would be paid instead, it still clearly believed that “…the amended TMLA will continue to permit Virgin America the ability to operate independent of the “Virgin” names and marks without the obligation to pay royalties”. That would not be true if in fact the Minimum Royalty was objectively intended by the parties to be due even if no use was made of the Names or Marks.

Initially, Virgin had suggested that amendments be made not out of a desire to reshape the form of Virgin’s licensing arrangement with Virgin America but rather to “get everything into one agreement” based on “[its] expectation…that the licence should effectively continue on the same terms as today, so I have limited the exercise to consolidation”.

Substantive amendments only came to be suggested by Virgin America as a result of concern from the investment bankers who were “concerned that investors would be worried that the agreement might terminate, and so they suggested that…we extend the term”. These concerns prompted the request from Mr Varley that a longer term be included, along with the elimination of the revenue threshold for term extension. Those changes came at a price: namely, the introduction of a Minimum Royalty as well as an increase in the royalty rate until a revenue threshold was reached.

The objective aim of the transaction is therefore clear: to give certainty to Virgin America as to a term extension for its use of the Names and Marks, where such extension was previously dependent on a revenue target that was unlikely to be met and to give a higher and consistent return to Virgin (a higher share of revenue and a minimum royalty in the event that its Names and Marks were used).

To that end, the parties were not interfering at all with the status quo in relation to the position where the Names and Marks were not used. Although (as explored with Mr Varley in XX) Virgin did attempt to introduce a change to the existing position (a “must exclusively use” provision), Mr Varley told Virgin that this would be a “fundamental change to the existing license agreement” and altering language that had been structured to address DOT concerns; the parties then agreed to stick with the 3.6/3.7 regime where Clause 3.6 remained expressly “subject to Clause 3.7.”.

Carriers must be US citizens, and therefore must not be under the actual control of foreign citizens. Whether a carrier is under the actual control of a foreign citizen is determined by applying the ‘totality of circumstances’ test.

Carriers have an obligation to notify the DOT of any changes which substantially alter the factors on which the DOT’s latest fitness finding was based.

Of not telling the DOT that the 2007 TMLA was being amended so as to require the payment of royalties even if the Names or Marks were not used; or

Of Virgin America either prior to or after the IPO, facing action from the DOT as a result of either (i) failing to notify the DOT of the change to the 2007 TMLA or (ii) the change itself.

On the one hand Virgin says it could not readily relicense the Names or Marks. But on the other Virgin simultaneously seeks to say that Virgin America would have paid the Minimum Royalty in order to prevent others in the market using the Names or Marks (an argument premised on Virgin’s ability to relicense readily the Names or Marks).

Whichever way that tension is resolved, Alaska’s construction of the Current TMLA is the correct one:

In my view, it is necessary to read these clauses together and to seek to give content to both, if that is possible.

It is also necessary to take a step back and to ask, in the context of the agreement viewed as a whole, what the likely purpose of these Clauses was. The overall purpose of the agreement was to enable Virgin America to use the Virgin brand. Whilst it is true that they were to be free to fly without using the Virgin brand and without paying royalties on such flights, it is clear that this was a subsidiary matter. What was important was that Virgin America should be free to use the Names and Marks. That is what they were bargaining to be free to use.

It is also clear that where they did not in fact use the Virgin brand, they would not pay royalties. This is because of the mechanics of the calculation of amounts payable; but the point goes no further than this.

The parties did know that the process of getting approval from the DOT in 2007 was a protracted and difficult one.

The parties also knew that the DOT in 2007 had been concerned to ensure both that Virgin America had the ability to carry out flights which would be independent of the association with Virgin, and that such flights would be free of any royalty payments to Virgin.

I accept that Clauses 3.6 and 3.7 had been inserted into the 2007 TMLA to meet these concerns.

It is clear that, by virtue of the IPO and the reduction in Virgin’s rights of control associated with the renegotiations in 2014, Virgin were giving up valuable rights which were material to the issue of whether Virgin America were to be regarded as a US citizen.

It is also clear that, by virtue of the changes in the control structure, the risk of a de-brand was increased.

It is, in my view, clear that the prolongation of the term of the agreement was thought to be in Virgin America’s interest, and it is further the case that Virgin America’s bankers wished for this.

The DOT were fully apprised of the terms of the Current TMLA, having been provided with red-lined versions of that document by the parties.

As regards the evidence of Mr Varley that it was made clear at the meetings that Virgin America had with the DOT that no royalties would be payable if there was no use of the Virgin brand, I do not accept that evidence. Whilst I do not find that Mr Varley was deliberately trying to mislead me, then I take the view that he was led to give evidence which went beyond his true recollection. Certainly there is nothing in the contemporaneous documents to support his evidence, which was (taken overall) not very clear in any event; and his witness statement did not reflect his oral evidence in this regard.

The DOT came back, after their consideration of the TMLA and the meetings with Virgin America, with their letter of 20 October 2014. Each party relied on different parts of that letter. In my judgment, whilst it made reference to the right to fly free of the payment of Royalties, it was also clear that the DOT understood that the TMLA provided for the payment of a Minimum Royalty. I do not think that there is anything in this correspondence which really assists me in relation to the proper construction of the Current TMLA, which I must simply construe by reference to the words used by the parties.

In my judgment, the start point must be the words of the Current TMLA, and in particular Clause 8. I have set out the relevant clauses above. I have concluded that these words are clear. The Minimum Royalty is a defined term, and is a set sum payable for every year of the contractual term, regardless of the level of usage of the Virgin brand. That is clear from the definition of the term, and from the clauses setting out how that sum is to be calculated. Just as that minimum sum falls to be paid if some royalties (not a defined term) are earned in a year but fall short of the Minimum Royalty, so, if no royalties are earned, it remains the case that the minimum sum has to be paid.

I do not think that the fact that the minimum sum is expressed as a “Minimum Royalty” means that it must be derived from royalties in fact earned. Alaska itself contended that for Virgin to be correct, the Minimum Royalty would have to be a flat fee rather than a royalty. In my judgment, that is exactly what the Minimum Royalty is. It is a flat fee payable for the right to use the Virgin brand, whether or not that right is taken up. Again, in that regard, I accept Virgin’s submissions.

In my judgment, this conclusion is supported by what I regard as the most important aspect of the factual matrix, namely the degree of uncertainty introduced by the other changes to the 2007 TMLA in 2014 and the risks undertaken by Virgin as a result of these changes. It is clear that, viewed from the perspective of Virgin America, the extension to the right to use the Virgin brand was a valuable one. It is also clear that Virgin was losing a substantial number of rights of control and that there was, as a result, an enhanced risk of a de-brand. In these circumstances, I think that it is a reasonable commercial conclusion to reach that Virgin would wish to assure themselves of a guaranteed minimum income going forward.

Conversely, I do not regard the factual background matters put forward by Alaska as of any great force, and indeed it is not clear what principle of construction is being relied on in this regard.

Overall, I have concluded that, quite clearly, on the wording of the Current TMLA, the parties did in fact agree that Virgin America should pay a continuing minimum fee for the right to re-use the Virgin brand (whether or not they chose to do so).

First, I agree with Virgin that the question must be approached from the perspective of Virgin and Virgin America as at the date of the agreement, and not from the perspective of Alaska.

Secondly, viewed against this background, it was clearly the case that Virgin America wished to continue to have the right to use the Virgin brand, and was prepared to pay for this.

Thirdly, it was in Virgin America’s interests (and in those of its bankers) to have a long term relationship with Virgin.

Fourthly, it was also relevant to note that Virgin would wish to have some form of comfort to ensure that it was remunerated for giving this approval.

Fifthly, I accept that Virgin’s ability to re-use the Virgin brand in the US was limited, whereas Virgin America’s right was established.

Sixthly, I do not accept that there was any question of Virgin America acting in breach of its statutory obligations. As I have said, the approval of the DOT was necessary. The full terms of the Current TMLA were put before the DOT, who approved that document. Their letter does, it is true, make reference to the right not to use the Virgin brand; but it also makes reference to the fact that a Minimum Royalty is to be paid.

First, Alaska pointed to the definition of Minimum Royalty which refers to a pro rata amount in respect of part years. However, Virgin contended that this was plainly intended to deal with part years at the beginning and end of the term. Whilst, Virgin said, Alaska argued that “[t]here is no meaningful difference between the Current TMLA ending in the middle of a financial year (where pro-rating is expressly provided for), and Alaska ceasing any use of the Names or Marks in the middle of a financial year”, this was incorrect. In point of fact, there were multiple meaningful differences between part years at the beginning and end of the term (which were a necessary consequence of the Current TMLA being executed, and the IPO taking place, in November) and part years of usage. During part years of the term, Alaska would not be the beneficiary of the grant of the right during the whole year. Therefore it was entirely sensible for the fees to be pro-rated. That is not true of part years of usage. Whether to use the Virgin brand on any given day was a matter entirely in Virgin America’s gift, subject to the obligations under Clause 3.6. Further, pro rating for part years of the Term of the Current TMLA was expressly provided for, whereas no such provision was made for part years of non-usage.

Second, Virgin sought to deal with Alaska’s reliance on the Apportionment Act 1870. They argued that it did not assist Alaska to say that the Minimum Royalty is apportioned if it was still due for the remainder of the year where there has been use during the year. In this regard, it was submitted that the Apportionment Act 1870 was brought in to deal with the problem of part-earned consideration. It allows a claimant in certain circumstances to claim part of the consideration where part of the performance due under the contract has been rendered. In this case, apportioning the payment leaves open the question of whether it is due during the part-year for which no use has been made. It is notable, Virgin argued, that Alaska has never gone so far as to say that no consideration is given for the Minimum Royalty in a non-usage year; Alaska’s argument are all of the nature that the price is too high. In fact, Virgin argued, the Apportionment Act 1870 is not applicable. The Minimum Royalty Obligation is not a periodical payment in the nature of income, such as a salary. The Minimum Royalty is simply a minimum figure. The amount due may be more than the Minimum Royalty, if the four quarterly payments due under Clause 8 amount to more than the Minimum Royalty. Further, the amount of the Top Up necessary to meet the obligation to pay at least the Minimum Royalty will vary depending on how much revenue is generated during any given year. This will not be known till the end of the year. This indicates that it is not possible to pro-rate the Minimum Royalty on a daily basis, because the amount due as a Top Up (if any at all) depends on events taking place during the year. Finally, the express provisions of Clause 8, requiring a Top Up at the end of the year, are inconsistent with the application of the Apportionment Act 1870 in the manner which Alaska suggested.

Finally, the argument was put forward that requiring the full Minimum Royalty irrespective of the number of days of use was commercially unreasonable. However, this was not the case, because, as noted above, Virgin’s argument was that the right to use the Virgin brand was valuable consideration.

I accept that this issue does not arise if Virgin is correct on Issue 1. Since, as I have indicated already, it is my view that it is, then this issue becomes an irrelevance.

However, I do not accept that this issue is irrelevant if Virgin is wrong on Issue 1. That is because this issue looks to the question of whether, if Alaska has made some use of the Names or Marks (whether or not it had to) Virgin is entitled to the Minimum Royalty. In my judgment, where some use has been made of the Names or Marks, then, on the true construction of the contract, the Minimum Royalty is payable.

I reach this conclusion, essentially, for the reasons set out by Virgin, which I have outlined above. Both the manner in which the Minimum Royalty is calculated, and the definition of that sum, indicate that where some use is made of the Names or Marks, then the Minimum Royalty is payable; and I accept that the Apportionment Act 1870 is irrelevant (for the reasons argued) and that the provisions for partial use in the contract relate to the years in which partial use is of necessity, given the timing of the contract.